Singapore Stock Alpha Picks - A Challenging February But Look Ahead

We selectively tweak our portfolio, but maintain exposure to large caps with a bent into asset inflation and reasonable dividend yield.

WHAT’S NEW

A challenging February.

Except for DBS, most of our alpha picks suffered absolute declines of 2-9% in February. Among the worst hit were Wing Tai (-9.1%) and CD REIT (-8.8%, unadjusted for a final DPU of 5.12 S cents/share that went ex on 1 February) on profit taking and interest rate fears, stoked by uncertainties over inflation.

However, we are sticking with these recovery plays and reflation picks, with a macro overlay of a synchronised global growth as and rising inflation, which would benefit property prices.

ACTION

Adding in OCBC; locking in profit on SIA and cutting loss on GL.

We add OCBC to position ahead for the upcoming IPO or trade sale of its 30% stake in Great Eastern Life Malaysia (GELM) in 2H18.

SIA has been removed to lock-in a 3% gain since its introduction in Jan 18 and the impact from a potential rise in passenger service charge (PSC) by Changi Airport.

Lastly, we cut losses on GL given the lack of any near-term catalyst, despite its deep discount to the SOTP valuation of S$1.185.

OCBC – BUY (Jonathan Koh)

Significant improvement in CET-1 CAR in 4Q17. OCBC is well capitalised with a fully loaded CET-1 CAR improving 1.1ppt q-o-q to 13.1% in 4Q17 due to the implementation of internal ratings-based approach (IRBA) for Bank of Singapore and reduced deduction in capital for Great Eastern.

IPO for Great Eastern Life Malaysia a key catalyst. Management will evaluate the divestment of a 30% stake in Great Eastern Life Malaysia through an IPO or trade sale.

Great Eastern has to submit its plan to Bank Negara by Jun 18 and execute the plan likely in 2H18. Proceeds from the divestment could be reinvested to further propel growth in its core commercial banking business.

Clarity from dividend policy. We estimate DBS’ dividend payout at 57% for 2018 with a concurrent improvement in ROE to 11.1% by returning surplus capital. The new dividend policy should also help ease some investors’ concern of an overly aggressive bid to acquire another regional bank.

Singtel – BUY (Jonathan Koh)

Telkomsel continues to maintain double-digit growth in subscriber base and revenue growth from voice and data. Bharti should start to recover in 2019 due to industry consolidation (Bharti merged with Tata Teleservices’ consumer mobile business).

The group is least affected by a fourth mobile operator in Singapore as overseas businesses account for about 70% of its bottom-line. BUY with DCF-based target price of S$4.40 (6.25% required rate of return and 1.5% terminal growth).

Share Price Catalyst

Events: Funds flow into laggards and defensive stocks, including Singtel which offers a good dividend yield.

Wing Tai – BUY (Vikrant Pandey/Loke Pei Hao)

BUY with RNAV-based target price of S$2.78, pegged at a 20% discount to RNAV of S$3.48/share. Wing Tai is trading at 0.56x 2018F P/B (lowest within our coverage) and a deep 37% discount to RNAV.

With a net cash of S$54.9m, Wing Tai is well positioned to deploy its sizeable debt headroom of S$1.6b (assuming comfortable net gearing level of 50%). We believe Wing Tai will further deepen its footprint in Singapore, Malaysia (post privatisation completion) and Australia.

Share Price Catalyst

Events: Launch of the recently-acquired Serangoon North Avenue 1 site. We also see potential for Wing Tai to buy more landbank given its S$1.6b acquisition headroom.

Timeline: Potential 6-9 months for landbank acquisition or launch of its Serangoon North Avenue 1 site.

Stock analysis research and articles on this site are for the purpose of information sharing and do not serve as recommendation of any transactions. You will need to make your own independent judgment regarding the analysis. Source of the report is credited at the end of article whenever reference is made.